Sunningdale Tech - UOB Kay Hian 2020-08-11: Inflection Point For A Strong 2H20 & 2021; Upgrade To BUY

SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - Inflection Point For A Strong 2H20 & 2021; Upgrade To BUY

Sunningdale Tech's 2Q20 core net profit of S$2.5m was a strong beat vs our 2020 estimate of S$1.5m. Key positives include:
1. strong gross margin in 2Q20 (+4.9ppt) despite challenges from COVID-19,
2. robust operating cash flow of S$46m in 1H20 (+283% y-o-y), and
3. strong revenue growth for the healthcare business in 1H20 (+18% y-o-y).
We raise our 2020F and 2021F EPS by 553% and 82%. Our target price increased by 48% to S$1.57, pegged to 5.0x 2021F EV/EBITDA (5 year mean).
Upgrade to BUY.

Sunningdale Tech (SGX:BHQ)’s 2Q20 core net profit was at S$2.5m, up from a loss position of S$0.7m in 2Q19, despite the 20.5% y-o-y decline in revenue. The results were a positive surprise and significantly higher than our 2020 full year estimate of S$1.5m.

The key driver for the stronger-than-expected set of results was the improvement of gross margin which was largely due to the completion of the relocation of the group’s part operations in Shanghai to Chuzhou, change in product mix, better cost optimisation and an overall improvement in operational efficiency.
The gross margin was also lifted by a reduction and exemption of social security contributions in China and the waiver of foreign worker levy in Singapore. Excluding these waivers, gross profit margin for 1H20 would be 0.8ppt lower.

Sunningdale Tech’s healthcare segment and mould fabrication segment earnings increased by 26.7% y-o-y and 0.4% y-o-y to $19.2m and $25.8m respectively, mainly driven by the increase in orders due to COVID-19 and new projects launched.
On the flip side, revenue from automotive and consumer/IT continued the downtrend, declining 50.0% y-o-y and 12.3% y-o-y respectively. The automotive industry was affected mainly from restrictions of movement in certain countries where the group has operations and at the same time customers in US and Europe were also affected. The consumer/IT segment was also affected by certain delays in product launches.

Sunningdale Tech has declared an interim dividend of 1.8 S cents per share, down from the interim dividend of 3.0 S cents per share in 1H19. The group’s decision to lower dividends was to conserve cash given the highly uncertain environment. Additionally, this period of crisis may pose opportunities for M&A. See Sunningdale Tech Dividend History.

Barring another round of lockdowns, we reckon sales should gradually improve as production ramps up in 2H20. Operations in China, Singapore and Malaysia have resumed while its operations in Mexico are progressively ramping up following the easing of lockdown measures since 31 May 20. India is currently still under a partial lockdown which is expected to be in place until 31 Aug 20.
In terms of segment, management expects the healthcare segment to continue to garner momentum as the group has secured additional projects from both new and existing customers while the consumer/IT segment has seen a gradually recovery since Jun 20.

We expect the higher gross margin trend to continue as the group tightens cost controls and benefits from an improvement in operating leverage as utilisation rate increases.

We raise Sunningdale Tech's 2020-22 earnings forecasts to S$10m-22m, up from S$1.5-21.5m previously (2020F:+553%, 2021F:+82%, 2022F:+72%). We factor a higher gross profit margin at 12.5% (+2.0ppt), 12.8% (+1.5ppt) and 13.2% (+1.7ppt) for 2020-22 as we take into account higher cost savings from the completed relocation of the Shanghai plant, better operating leverage and a higher mix towards healthcare products. We keep our revenue estimates largely unchanged.
Risks include unfavourable forex rates, further pricing pressure from customers and lower-than-expected utilisation.

Upgrade to BUY with a higher target price of S$1.57 (previously S$1.02). We switch our valuation methodology for Sunningdale to EV/EBITDA from P/B to better reflect the earnings recovery.
Our target price is based on a target EV/EBITDA multiple of 5x 2021F PE, based on its 5-year mean. This is also at close to a 20% discount vs the peer average EV/EBITDA of 6x 2021F. Also, Sunningdale Tech is currently trading at 0.6x P/B, the cheapest among its peers.
See Sunningdale Tech Share Price; Sunningdale Tech Target Price; Sunningdale Tech Analyst Reports; Sunningdale Tech Dividend History; Sunningdale Tech Announcements; Sunningdale Tech Latest News.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-11

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